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NTA Update: 

NTA Update Andrew Mason January 20, 2006

Goals of the NTA Project: 

Goals of the NTA Project Develop a system of accounts that can be used to describe and to analyze how populations or economies shift resources from working ages to dependent ages across generations Apply the system to different social, political, cultural, and economic settings Study: how systems have evolved over time, how they influence economic growth and inequality how they interact with changes in population age structure and public policy

Slide4: 

Surplus Deficits Life cycle deficit is equal to the difference between consumption and labor income at each age.

Slide5: 

Upper panel measures the difference between production and consumption over the lifecycle. All values are totals for the age group. Per capita values are also estimated.

Methodology: Economic Lifecycle: 

Methodology: Economic Lifecycle Household and public consumption individual consumption Education Health Other private consumption Labor Income Earnings of employees Labor income of self-employed

Unresolved Issues: 

Unresolved Issues Classification of private consumption that is heavily subsidized by the public sector Labor income and labor productivity differ

Selected Estimates: 

Selected Estimates

Slide9: 

Source: Mason, Lee, Tung, Lai, and Miller forthcoming.

An Application (WP05-07): Two Demographic Dividends: 

An Application (WP05-07): Two Demographic Dividends Age structure interacts with the economic lifecycle to produce two demographic dividends If the effective number of producers increases faster (slower) than the effective number of consumers, output per effective consumer increases (declines). Changes in age structure affect the demand for lifecycle wealth and its component capital

Growth Identities: 

Growth Identities

Growth Identity: 

Growth Identity First Dividend: Growth of the support ratio Second Dividend: Growth of productivity from capital deepening

Empirical Analysis: 

Empirical Analysis Demography evolves very slowly; hence, the focus is on the long-term Three countries for which historical demographic and economic data are available India (1881 – ) Japan (1900 – ) US (1850 – )

Data for constructing the support ratio and the first dividend: 

Data for constructing the support ratio and the first dividend Population data Various sources for historical series UN Population Prospects (2005) UN long-term projections (2004) Economic lifecycle US production and consumption age-profiles (Mason et al. forthcoming). Estimates for Japan and India will be available within the year.

Calculation of Second Dividend: 

Calculation of Second Dividend Demand for capital is proportional to lifecycle wealth of those 50+ Lifecycle wealth of those 50+ W(50+) = PV[C(50+)] – PV[Yl(50+)] Cross-sectional age profiles of consumption and production shift proportionately over time Productivity growth and interest rates are exogenous and constant

Implementation: 

Implementation Data Same as for first dividend Other assumptions Interest rate: 3% Productivity growth: 1.5% Elasticity of output wrt capital: 0.33

Lifetime of the cohort aged 50-54 in 2000, Japan: 

Lifetime of the cohort aged 50-54 in 2000, Japan Population Labor Income Consumption

Calculation of wealth for cohort aged 50-54 in 2000, Japan: 

Calculation of wealth for cohort aged 50-54 in 2000, Japan

Implications of Analysis: 

Implications of Analysis Pre-World War II In India and Japan, demography had little effect on per capita income, wealth, etc. In the US, however, demographic change was very favorable. Approximately a three-fold increase in the wealth-income ratio Contribution to growth in Y/N of 0.9 percent per year for 90 years!

Decades following WWII: 

Decades following WWII In India, demographics were mildly favorable. In Japan, rapid fertility decline and rapid improvements in life expectancy had very substantial pro-growth effect – 2.3% per year between 1950-1980 The baby boom led to moderately unfavorable economic growth in the US Wealth in Japan boomed relative to the US

Recent decades: 

Recent decades In India, 1st and 2nd dividend both favorable – growth higher by 1.4% pa In Japan, demography still favorable (due to 2nd dividend) – about 1.0% pa. US, demography also favorable but 1st dividend is better and 2nd worse than in Japan – about 0.9% pa.

Future – 2005-2050: 

Future – 2005-2050 India – great: 1.2% pa US – so-so: 0.2% pa Japan – not so good: - 0.5% pa

Many Unanswered Questions: 

Many Unanswered Questions How does the economic lifecycle vary over time and across countries? Is that variation important as compared with the changes in age structure? How does the reallocation system vary across countries and how is it changing over time?

NT Flow Account Identity:: 

NT Flow Account Identity: Inflows Labor income Capital income Interest income Transfer inflows Outflows Consumption Investment Accumulation of credit Transfer outflows

NT Flow Account Identity:: 

NT Flow Account Identity:

Slide37: 

Lower panel measures the reallocation systems employed to satisfy the lifecycle deficits and surpluses at each age. Asset-based reallocations combine capital, other non-financial assets, and credit. Source: Mason, Lee, Tung, Lai, and Miller, forthcoming.

Methodology: 

Methodology Transfers Public transfers, current Age profile of outflows (tax incidence) Age profile of inflows Private transfers, current Inter-household current transfers Intra-household current transfers Capital (or asset?) transfers Public Private

Methodology: 

Methodology Asset-based Reallocations Public Capital Credit Private Capital Credit

Unresolved Issues: 

Unresolved Issues Treatment of foreign sector Other? Recent methodological developments and unresolved issues to be discussed Saturday afternoon.

The End: 

The End